Why Baidu Will Become Bigger

Baidu (BIDU) announced first quarter ended March 31, 2016 total revenue of RMB15.821 billion, up 24.3 percent year-over-year from RMB12.725 billion in first quarter of 2015 but, down 15.4 percent sequentially from RMB18.699 billion in fourth quarter of 2015. Going forward, the company estimates second quarter of 2016 total revenue to be in the range of RMB18.1 billion to RMB18.2 billion.

Baidu declared first quarter of 2016 non-GAAP net income of RMB2.359 billion or RMB6.80 per diluted share, down 90.6 percent sequentially from RMB25.053 billion or RMB72.24 per diluted share in fourth quarter of 2015 and down 14 percent year-over-year from RMB2.740 billion or RMB7.77 per diluted share in first quarter of 2015.

The Chinese internet service provider reported continued year-over-year top line improvement primarily due to healthy growths in mobile search monthly active users (MAUs) and mobile maps MAUs.

Strong market share

The market-leading Chinese search engine provider is believed to capture nearly 80% of total market share in terms of revenue and thus, Baidu is estimated to notably gain from the consistently expanding global internet search engine market.

According to iResearch, revenue for China’s search advertising market is expected to grow to about RMB 145.6 billion till 2018 from RMB 52.5 billion during 2014. But, there seems to be a significant threat to the company’s dominance in the Chinese internet search market.

According to iResearch market analysis, the Chinese Internet advertising market including, advertising on mobile devices and PCs while excluding the overlapping devices is projected to expand at a CAGR of 28% from fiscal year 2014 till 2018 to register RMB 420 billion. Moving ahead, the global internet advertising market is expected to be driven by significant and consistent expansion in allocated budgets for mobile advertising. Moreover, iResearch expects the Chinese mobile advertising revenue to expand notably to RMB220 billion till 2018 from RMB 30 billion during 2014.

The rapidly expanding usage of mobile devices globally for internet-related searches is believed to significantly benefit the already market-leading internet search provider that derives a majority of its top line growth from its online advertising business.

Strong growth in the end-market

In accordance with iResearch, search engine market share in the consolidated data for online advertising globally is believed to expand to 37.0% till 2018 from 34.1% during 2014. In addition, revenue for the search engine market in China is projected to expand at a CAGR of 29% over fiscal years 2014 till 2018 to approximately RMB 145.6 billion.

Going forward, the search revenue of Baidu is expected to grow notably over the company’s projected and market-leading growth figures from $5.7 billion during 2014 to more than $30 billion till 2021. This superior growth projection is contributing to Baidu’s market-leading performance of search services given its expanding dominance in mobile search. Therefore, Baidu is expected to significantly benefit from quick expansion in the Internet advertising market of China.

The consistently growing search engine advertising market in China is no doubt going to notably benefit Baidu but, again poses danger of the rising competition in the lucrative industry which demands consistent innovation delivering capabilities from Baidu.

Conclusion

Overall, the investors are advised to “Buy” equity in Baidu, Inc. considering the company’s industry-leading market share in addition to notable near-term and long-term growth prospects being supported by a solid total cash position of $10.87 billion and smaller total debt position of $5.33 billion only, encouraging the company to make future growth investments while delivering attractive shareholder returns. The profit margin of 47.79% seems extremely impressive. However, the PEG ratio of -4.21 appears misguiding and depicts poor company growth compared to somewhat healthy industry’s growth average of 0.82.